Common Cents

Common Cents By Elliot Pepper, CPA, CFP®, MST SECURE 2.0 – Big Changes for Retirement Planning

It’s not the most imaginatively named legislation, but the SECURE 2.0 Act expands the 2019 SECURE Act to make it easier to have a successful retirement. The legislation tackled retirement savings at several points on the financial journey, with a provision to enhance or facilitate saving and investing for almost everyone.

Whether you have student loans, need to catch up in the final years before retirement, are facing taking required minimum distributions in retirement, or want to enact a charitable giving strategy, new rules create a smoother path.

Combining all the different facets into one piece of comprehensive retirement legislation is an efficient way to enact changes, but it’s also a good reminder that retirement is never a “one-and-done.”

It is a continuum in which you spend the decades of your working years accumulating retirement savings, and then you flip to decumulation as soon as you retire. The two mindsets – of saving and spending – are very different. But the planning you do at each stage of the journey impacts the stages to come.

Just like taxes, retirement requires a multi-year financial planning strategy to keep you on track. Our quick read breaks down the major changes and will hopefully get you thinking about both your current stage and what you can do to maximize your retirement assets for the stages to come.

The Early Stages: Automatic Enrollment, Emergency Savings, and Student Loan Matching

Automatic enrollment in a retirement plan can mean building up invested savings from the earliest years of a career, which provides the longest amount of time to benefit from the power of compounding. Beginning in 2025, new employer-sponsored plans will be required to automatically enroll eligible employees, with a contribution rate of at least 3%. This is coupled with new rules around portability. These often lower-balance accounts will also be allowed to be automatically transferred to a new plan in the event of a job change.

The 10% penalty on withdrawals from tax-deferred retirement plans often puts saving for retirement in opposition to building up an emergency fund. Not anymore. Starting in 2024, plans are allowed to add designated Roth accounts for emergency savings for non-highly compensated employees. Contributions are limited to a maximum of $2,500. The first four withdrawals in a year from the account will be penalty-free.

Student loan payments can be one of the bigger bites out of the paycheck in earlier career stages. Trying to pay off debt and contribute to retirement accounts is often out of reach. The new law mitigates this by allowing an employer to match student loan debt payoff amounts, so retirement savings can still accrue.

Late Career Catch-Up Contributions Are Increasing

The catch-up contribution for those 50 and above is one of the best ways to increase your retirement savings in the later years of your career. For 2023, the catch-up amount is increasing to $7,500. Beginning in 2025, the catch-up for workers aged 60, 61, 62, or 63 will be even larger. These employees are allowed to contribute the greater of $10,000 or 150% percent of that year’s inflation-indexed catch-up amount.

However, the tax treatment of catch-up contributions is changing. if prior-year earnings are more than $145,000, the age 50+ catch-up contributions must be made with after-tax dollars to a Roth account.

The Decumulation Phase Gets More Flexible

Tax-deferred contributions to retirement accounts lower taxable income in the years when you make them, but the IRS eventually comes looking for their cut. The age to begin required minimum distributions (RMDs) is moving from 72 to 73 in 2023, providing an extra year for retirees that want to take advantage of lower asset values by converting some other of their savings in tax-deferred accounts to a Roth IRA. The amounts converted will lower the value of the account, which will reduce the amount of the RMD.

Beginning in 2033, the age for RMDs will move to 75. This expanded window can provide for significant tax-planning strategies, including the timing of asset sales and more time to convert additional funds to a Roth for income and tax planning.

The Bottom Line

Starting early and taking advantage of the tax benefits – and the power of compounding – are the key features of the years in which you are saving for retirement. The goal is to retire successfully and have enough to live the life you want. But saving is just one piece of the puzzle. Thinking strategically about retirement at every stage can keep your plans on track.

The decision to start saving and investing is yours, but the “how” can be hard. We suggest speaking with a “fee only” financial planner operating as a fiduciary - having a CPA or tax background is a huge plus. Email commoncents@northbrookfinancial.com to schedule a free financial planning consultation with our team.

Elliot Pepper, CPA, CFP®, MST is Co-Founder of Northbrook Financial, a Financial Planning, Tax, and Investment Management Firm. He has developed and continues to teach a popular Financial Literacy course for high school students.